Short ETFs Shine

January 21, 2008

SAN DIEGO (ETFguide.com) - As stocks continue their downward slide, exchange-traded funds (ETFs) that short key stock market indexes are recording strong gains.

Stocks as tracked by major averages are having their worst start in decades. Through the close of January 18th, the Dow Jones Industrial Average is off by 8.8%, the Nasdaq Composite is down by 11.8% and the S&P 500 has lost 9.8%.

The declines have meant good news for short ETFs.

The ProShares Short Dow (Ticker: DOG) is up 9.7%, the Short S&P 500 (Ticker: SH) is ahead by 10.8%, and the Short QQQ (Ticker: PSQ) has increased by 13.3%.

The U.S. economy is being hit with a wave of bad news from reduced consumer spending, to rising inflation, a weak U.S. Dollar, and a nationwide housing slump.

Short ETFs are inverse performing funds designed to move in the opposite direction of their underlying indexes. As stocks fall in value, short ETFs that track stock indexes will generally rise. Some short ETFs use leverage as they attempt to double the daily downside performance of the indexes they follow.

Among the strongest performing ETFs this year are leveraged short funds. The ProShares UltraShort Semiconductors (Ticker: SSG) is ahead by 51.6%, the UltraShort Financials (Ticker: SKF) is up 29.8%, and the Rydex Inverse 2x S&P MidCap 400 (Ticker: RMS) has jumped 29.5%.

Currently, there are 38 inverse performing ETFs listed on U.S. exchanges. The areas covered include specific industry sectors, emerging markets, international stocks, and even single countries like China and Japan. ProShare Advisors and Rydex Investments manage the majority of these specialty funds.

How much longer can short ETFs continue their run?

Much will depend on the U.S. economy and the impact of a recession. The last U.S. recession was in 2001 and it lasted roughly 7 months. During that short span, the S&P 500 fell 36.49% from its pre-recession peak.

If more bad news is on the way, it could mean good news for short ETFs.